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UK inflation fell to a 15-month low of 7.9 percent in June, a larger-than-expected drop that sent the pound lower, property stocks rally and Prime Minister Rishi Sunak pushed back.
Wednesday’s figures led investors to scale back their interest rate hike expectations, with markets now betting on a quarter-point increase instead of a half-point at the next BoE meeting on August 3.
The British pound fell to its lowest level in a week, trading down 1.1 percent against the dollar at $1.2897.
The Office for National Statistics said annual inflation fell from 8.7 percent in May, below the 8.2 percent forecast by a Reuters poll, ending a four-month period during which inflation exceeded expectations.
“With significant drops in inflation now taking place, the UK is less of an anomaly in the battle to tame inflation,” said James Smith, director of research at the think tank Resolution.
Buoyed by the lower cost of motor fuels, the headline number was the lowest since March 2022, while core “core” inflation fell slightly to 6.9 percent.
Paul Dales, an economist at Capital Economics, said that while the decline in inflation is unlikely to deter the Bank of England from raising interest rates next month, “the balance may tilt towards a 25 basis point hike rather than 50 basis points.”
Markets are now placing a 60 percent chance that the Bank will increase its benchmark interest rate from 5 to 5.25 percent at the August 3 meeting.
Ahead of Wednesday’s numbers, they were seeking to price in a better chance of the Bank raising interest rates by half a percentage point to bring inflation back to its 2 percent target.
Traders expect the Bank of England’s benchmark interest rates to peak below 6 per cent early next year. Before the inflation figures came out, they were expecting a peak of just over 6 percent.
Dave Ramsden, a deputy governor of the Bank of England who serves on the Monetary Policy Committee, warned on Wednesday that inflation remains “very high”, highlighting the MPC’s concerns about wage growth and labor market tightening.
The latest data showed wage growth accelerating to a record high.
But despite these concerns, shares rose in UK property groups and homebuilders as investors concluded that mortgage rates will now also rise less than they had previously predicted.
Persimmon, Barratt and Taylor Wimpey rose 8.3 percent, 7 percent and 6.8 percent, respectively, helping London’s FTSE 100 rise 1.8 percent.
Land Securities, one of the UK’s largest landlords, and property group Segro were also among the FTSE’s biggest winners on Wednesday.
Myron Jobson of Interactive Investor, an online investment platform, said resetting expectations “could spell an end to the chaos that has engulfed the mortgage market in recent months.”
The inflation figures were also good news for Sunak, who has sought to put economic efficiency at the heart of his electoral appeal but is lagging far behind in opinion polls and faces three tough by-election tests on Thursday.
Downing Street said it was “encouraging to see headline and core inflation rates falling” but acknowledged that businesses and households were still suffering from rising prices.
Asked if Sunak was confident inflation would be halved by the end of the year to 5.4 per cent – one of five pre-election pledges made by the prime minister – his spokesman said: “We have made that commitment. We will not foresee.”
But Rachel Reeves, the shadow chancellor, asserted that “persistently high” inflation under Sunak’s government “has become a hallmark of the Tories’ economic failure”.
One of the most closely watched measures was the drop to 6.9 percent in core inflation, which excludes volatile food, energy, alcohol and tobacco prices. It had reached a 31-year high of 7.1 percent the previous month, a level that analysts had expected it to remain.
Services inflation also eased to 7.2 percent in June from 7.4 percent in May.
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Although remaining at historically high levels, food inflation also eased to 17.3 percent in June from 18.3 percent in the previous month.
Overall inflation remained higher in the UK than in other G7 nations, which economists blamed on a combination of rising energy costs and a labor shortage.
In June, inflation slowed to a 27-month low of 3 percent in the United States and to a 17-month low of 5.5 percent in the eurozone.
“It is likely that the UK will continue to have higher inflation rates than anywhere else for a while, but at least the UK is now following the global trend,” said Dales of Capital Economics.
Additional reporting by Mary McDougal
